Appreciation and Cash Flow Today
Falling Interest Rates, Declining Prices, Increasing Rents
Oct 12, 2009
Today’s market offers investors a very interesting opportunity. With hot markets experiencing a double digit decline in prices and rents holding steady or facing a slight decline, investors now have the opportunity to buy cash flowing properties with the prospects of strong appreciation.
Real Estate Markets
The dynamics in many hot markets are rapidly moving into a good place for investors. Markets like Los Angeles, San Francisco and Chicago are experiencing double digit declines in growth. Additionally, second tier markets like many in Florida and Las Vegas have experienced more than 30% decline in value.
Over the same time period, rents have experienced a much more modest decline, if any. Renting and owning is a zero sum game. People have to live somewhere and either they rent or they own. During the housing boom renters were becoming owners at a very heavy clip. Home ownership rates in the US and Canada skyrocketed. For owners of multifamily product or single family home renters that boom meant less demand for their product. The lighter demand muted rent growth for the past three or four years.
Rental Market
The tables appear to be turning. With owners choosing to return to renting or being forced to return, demand for rentals is beginning to pick up. Expect this trend to continue. The depressed housing market is creating a greater supply of rentals as homeowners, who can’t sell their properties, turn them into rentals. Despite this trend, rents don’t face the same decline in many markets as home value do.
In addition to the lower prices of homes and the steady rents, interest rates remain historically low. Although investors need to produce a 20% down payment and have stellar credit, they can secure a fixed monthly payment for the next 30 years. These low rates present buyers the opportunity to secure more expensive properties with relatively lower monthly payments. Putting these dynamics together affords buyers of investment properties the rare opportunity to secure cash flowing rental properties in areas with strong expected future appreciation.
These opportunities only come along in a down market. At some point, home prices will reverse their declines. Landlords might experience a significant increase in rents before that time however, as the economy recovers. Don’t expect these opportunities to persist forever. Investors are savvy and will be snapping up these properties quickly. The process will be slowed by the current tight lending standards, so investors with capital should use this to their advantage. Buy cash flowing properties in strong neighborhoods today.
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